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Naoyuki Yoshino

Professor of Economics, Keio University, Japanyoshino@econ.keio.ac.jp

Capital Flow and need for infrastructure bond market and finance to SMEs in Asia

1, High rate of savings in Asia

i i1‐1, Domestic Savings, 

1‐2, Foreign reserves

2, Invest into US and European bond market

3, Short term investment from outside of Asia

Stock investment and hedge funds

4, Huge needs for long term investment

5, Infrastructure investment and SME finance

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The global economy more interconnected the size and volatility of capital flows has increased excess liquidity and the risk of potential asset bubbles. 

In several Asian countries (Thailand, Indonesia etc.)In several Asian countries (Thailand, Indonesia etc.)

(i) certain macro‐prudential regulations (ii) capital controls (iii) micro‐prudential regulations had been introduced In order to stabilize capital inflows from outside In order to stabilize capital inflows from outside 

of the region.an integral component of international finance from surplus countries to deficit countries, the Asian crisis a decade ago, once again emerges as a hot topic.

Need for the Structural Reform in Asian Financial Market

(1) “Using Asian Savings for Asian Investments”(1)  Using Asian Savings for Asian Investments  through development of Infrastructure bond markets to help develop bond markets in Asia. 

(2) To facilitate financial inclusion of SMEs, which are the most numerous type of business structure in Asia, 

creating a SME databasecreating a SME databaseand 

developing regional trust funds.(3) Supply side of finance: Need for long term Investors

such as Pension funds and Insurance

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Infrastructure

PensionFunds &Insurance

BondMarket

Gov. banks

GovernmentBond

LargeCompanies ordinary Banks

b k

Long term Credit Banks

structure

SME

VentureBusiness

SME banks

Venture Capital

Micro creditS

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Asia’s Characteristics1, Large Share oｆ SMEs (Small

and Medium Enterprises)and Medium Enterprises)

2, Bank Dominated Market3, Long term commitment4 L Sh f Mi C di4, Large Share of Micro Credit5, High Savings Rate

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1, High savings rate of Asia

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Naoyuki Yoshino, Keio University, Japan @CopyRight

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Country CountryUK

Euro region

Other Europe

Thailand No1 EU 10.33 4.57 5.67 0.09 Total=3,108 No2 US 8.88

Table 4 Where are investors into Asia ?

No3 Singapore 1.8No4 Indonesia 1.57No5 Hong Kong 1.55

Malaysia No1 EU 13.18 5.57 7.54 0.07 Total=3,781 No2 Singapore 7.51

No3 USA 5.67No4 Hong Kong 1.96No5 Australia 1 43

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No5 Australia 1.43Singapore No1 EU 629.28 356.82 260.54 11.91 Total=2,016.86

No2 USA 290.31

No3 Australia 169.66No4 Malaysia 167.83No5 Korea 90.3

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Debt Securities Investment in Asia(unit: million dollar)

Oth

Asia, 73,512,17%

US/Canda,66 051 15%

Others,115,328, 27%

EU 178 501

17%

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66,051, 15% EU, 178,501,41%

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Source of Financing Infrastructure Investment : (Pros and Cons)

(1) by tax payers’ money;(2) use of national savings such as national ( ) gsavings banks (or postal savings);(3) issue government bond to construct infrastructures;(4) utilizes both public money and private 

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sector money (i.e. Public‐Private‐Partnership).

Map of Japan from the North to the South

Hokkaido

TohokuHokuriku

NorthChugoku

Kinki

NorthKanto

South KantoTokaiShikoku

SouthKyushu

Kyushu

Okinawa(not included)

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Marginal Productivity of Public Capital(Regional Disparity)

0.7

0.8

0.3

0.4

0.5

0.6

SecondaryIndustry

TertiaryIndustry

0

0.1

0.2

Hokkaido Tohoku NorthernKanto

SouthernKanto

Hokuriku Tokai Kinki Chugoku Shikoku NorthernKyushu

SouthernKyushu

Highway Map in Apr.1, 1970

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Highway Map in Apr.1, 1980

Highway Map in Apr.1 2001

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Economic Effect of Public Capital(Productivity Effect)

TFP Regression

tP

tPtL

t

ttL

t

t

t

t

K

Ks

L

Ls

Y

Y

TFP

TFP

ln)1(lnlnln1,

,,

1,

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Translog Production Function

),,( KgLKpfYt ttt uCapitalPublicTFP )ln()ln(

Year 1956-69 1960-64 1965-69 1970-74Private Capital Stock 0.7558 0.7304 0.6463 0.4131Public Capital Stock 0.6487 0.8016 0.8168 0.0842

Year 1975-79 1980-84 1985-89 1990-93PrivateCapitalStock 0.3124 0.2578 0.2280 0.1995

t

Regressor (1) (2) (3) (4)Strict Strict Broad Broad

Constant -9.546** -7.148** -9.806** -8.066**Dummy (1974-) 6.448** 4.599** 5.495** 4.183**Dummy (1990-) 2.639 2.557** 1.641 1.603* Public Capital 0.587** 0.432** 0.600** 0.487**Public Capital (1974-) -0.367** -0.261** -0.310 -0.235**Public Capital (1990-) -0.134 -0.129** -0.080 -0.079* Trend Term ー 0.110** － 0.086** Private Capital Stock 0.3124 0.2578 0.2280 0.1995

Public Capital Stock 0.0397 0.0590 0.2525 0.2246

Source: Yoshino, Nakajima, and Nakahigashi (1999) Table 2-4

R-Squared 0.991 0.998 0.996 0.999D.W. 0.382 1.112 0.475 1.187

Note: *: statistically significant at 5% level **: statistically significant at 1% levelDummy(1974-) : dummy variable (after 1974=1, before 1973 = 0)Dummy(1990-) : dummy variable (after 1990=1, before 1989 = 0)Public Capital (1974-) : coefficient dummy (after 1974 = 1, others = 0)Public Capital (1990-) : coefficient dummy (after 1990 = 1, others = 0)

Effectiveness of Public Capital Stock‐ “Private capital/Public capital ratio” to “Marginal productivity of Public capital” ‐

Secondary Industry (Industrial Sector)0.4

Southern Kanto

0.2

0.3

Pro

duct

ivity

of P

ublic

Cap

ital

Southern Kanto

Tokai

Kinki

Chugoku

Northern Kanto

Northern KyushuShikoku

0

0.1

0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6

Private Capital / Public Capital

Ma

rgin

al

Hokkaido

Southern Kyushu

Tohoku

Northern KyushuShikoku

Hokuriku

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Table3 Allocation of Public Infrastructure in Japan: (Pooled data, 47 prefecture) Coeffcient Explanatory

Variables Agriculture Land

Conservation Industrial Infrastructu

Improvement of living

d d

Determinants of regional allocation of public investment (Political Power plays a role)

re standardsｙ

0 Constant -35.44 (-10.46**)

-34.26 (-11.32**)

-61.58 (-11.84**)

52.32 (8.00**)

1 Yp (Income) 0.01 (7.21**)

0.01 (13.18**)

0.02 (17.99**)

0.036 (25.86**)

2 Sp(AreaSize) 4970 (28.47**)

2090 (13.40**)

3855 (14.39**)

2730 (8.10**)

3 Rp(Political Power)

8280 (16.88**)

7274 (16.60**)

10956 (14.55**)

-7434 (-7.85**)

4 Dummy1 -23.21 -34.27 -59.81 -36.854 y

(-6.69**) (-11.06**) (-11.23**) (-5.50**)

5 Dummy2 27.43 (9.26**)

-1.65 (-0.62)

65.87 (14.48**)

66.89 (11.70**)

Adj. 2R 0.675 0.486 0.458 0.527

(1) ( ) denotes t-value

(2) ** is significant with 99.0% level,

Marginal Productivity of Public Capital, Japan(Production Function, 1956‐1993)

Year  1956‐59 1960‐64 1965‐69 1970‐74 ea 956 59 960 6 965 69 9 0

Private Capital Stock  0.7558 0.7304 0.6463 0.4131 

Public Capital Stock  0.6487 0.8016 0.8168 0.0842  

Year  1975‐79 1980‐84 1985‐89  1990‐93 

Private Capital Stock  0.3124 0.2578 0.2280 0.1995 

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Reprinted from Yoshino, Nakajima and Nakahigashi (1999) Table 2‐4

Note: This is estimated from the simultaneous regression of production function and labor share function. The estimation method refers to Yoshino, Nakajima and Nakahigashi (1999).

ate Cap ta Stoc 0 3 0 5 8 0 80 0 995

Public Capital Stock  0.0397 0.0590 0.2525 0.2246 

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Marginal Productivity of Public Capital, Japan(Production Function, 1980‐2004, Preliminary)

Y 1980 84 1985 89 1990 94Year  1980‐84 1985‐89 1990‐94 

Private Capital Stock  0.1587 0.1499 0.0658 

Public Capital Stock  0.3100 0.2654 0.2189 

Year  1995‐99 2000‐04

P i t C it l St k 0 0633 0 1551

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Private Capital Stock 0.0633 0.1551

Public Capital Stock  0.1752 0.1615

Figure 5Infrastructure Revenue Bond 

InterestP tPayments

AndPrincipalPayment

(70%)

PrivateInvestors

High‐WayToll 

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Tax Payers’Money(30%)

Government

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Figure 8, Rate of Return and the revenue bondr

A

B

C

rG

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D

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Figure 9, Convertible from Government Bond to Revenue Bond

rSuccess Case

rG

GovernmentBond Revenue Bond

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Failed Case

Time

Floor

ConstructionPeriod

Operation Period

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Examples of Trust Fundsby Internet in Japan; E-fund1, Solar Power Panel2, Japanese Sake (=Japanese

wine) producers’ fund3, Forest trust fund 4, Music trust fund5, Wind Power Generator6, Green Finance 31

Investors

Large Projects and Professional Investors

Pension Funds

Insurance companies

Mutual Funds

Community Type Infrastructure

Wind power Generator Funds

Japanese Wine Fund

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SMEs in China(Red Mark is SMEs’ share)

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Loan Supply CurveSME versus Large Companies

Interest SME Loan Supply Curve

te estRate

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LargeCompanies

Loan Supply

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Discussions

1, Long term financing to corporations

Large corporationsg p

2, large companies can access to bond market

3, SMEs and venture businesses

who will provide long term funds ?

4, Evaluation of risks of SMEs

5, SME database, CRD in Japan

6, Regional mutual funds, E‐funds

Bank based SME financing and Regional financing to Riskier Borrowers

1, Bank Loans to relatively safer borrowers2, Regional mutual funds / Regional fund2, Regional mutual funds / Regional fund

E-Finance, E-FundBankingAccount

Depositors

SaferSMEs

BankingAccount

Regional FundsMutual Funds

RiskierBorrowers

Investors

SMEs

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Separate Accounts of SME financing1, Traditional Bank finance

Private banks2, SME fund, Regional mutual funds, E-Finance

Sell these mutual funds through banks’ branch offices

3, Separating two accountsp g(i) Banking accounts (Guarantee by FDIC)(ii) SME funds, Regional mutual fund

(non-guarantee)41

Basel Capital RequirementsBasel III

1, Adequate Capital for Banks1, Adequate Capital for Banks2, To keep healthy3, SME loans will decline4, Micro credit 5, Loan sharks6, Education to SMEs and borrowers

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Revankar N. and Yoshino, N., (2008) “An Empirical Analysis of

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Japanese Banking Behavior in a Period of Financial Instability,”Keio Economic Studies, Vol.45 No.1.Yoshino, Naoyuki and Tomohiro Hirano (2011) “Pro-cyclicality of the Basel Capital Requirement Ratio and Its Impact on Banks ” (Asian Economic Papers, MIT Press, Vol.10,No.2)).

Keeping books by SMEs<Financial statements>

(i) Cash & deposits(ii) Amount of Sales (iii) Inventories(iv) Buying price (v) Amount of goods laid in(vi) Various costs

Equipment and Personal costs(vii) net profits

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Credit Rating System1, AAA, AA, BBB …………..

Single Numberg2, Various Characteristics needed to be

focused on:(i) Growth potential(ii) Good Management(ii) Good Management(iii) Technology etc.

3, Sudden Down-grading after Crisis45

SMEs Financial

Credit GuaranteeCorporations

(Collect Data of SMEs)

SME Data base (CRD Data base)

SMEs(14.4million

data)

Defaults(1.7million

Financial Institutions

200Regional Banks

Credit AssociationsCredit Cooperatives

( )52

1 G t S t(1.7million

data)p

Government BanksCentral Bank

1, Government Support2, Reliability

3, Security of InformationCRD

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Credit Rating for SMEs by Use of CRD Data

1 Credit Rating is only applicable to large 1, Credit Rating is only applicable to large companies2, Credit Rating for SMEs based on CRD Data3, Five ranking of SME (Japan’s case)4, Credit Guarantee ratio is determined 4, Credit Guarantee ratio is determined 5, CRD can obtain default risk ratio6, Risk based Interest rate

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Credit Rating of SMEs by Use of CRD Database

(i) Profitability it l i g ti(i) Profitability capital earnings ratio

(ii) Efficiency (iii) Productivity(i ) S f t (iv) Safety Liquidity ratio

(v) Growth Potential profit growth

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Risk Based Interest Rate(1) General Credit Risk(2) Credit Cost Ratio(2) Credit Cost Ratio[Default ratio}x(1-recovery rate)

(3) Costs = Personal and Equipmentq p

(4) Interest rate to raise money(5) Monitoring of SMEs by banks

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Financial Education for SMEsEducation Program and Textbooks

1 Financial Planners Association1, Financial Planners AssociationIndividual Borrowing

2, Central Bank of JapanText books, Educate School teachersRegional Education ProgramRegional Education Program

3, Various Financial AssociationsBankers Association, Stock Exchange

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Financial Planning for SMEs

(i) Education for SMEs( )(ii) Japan’s Banks provided consultation services to SMEs(iii) Financial Education for SMEsText book and Education trainingText book and Education training Book Keeping

Data collection51

Bankers and Micro creditshave to provide honest service

to SME borrowersto SME borrowers1, Association of Micro credit companieswas established in 2009 in Japan.Education to money lenders(micro credit companies)(micro credit companies)

2, Self regulations by the Association3, More than 50% joins the Association

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Borrower, Lender and Market

BorrowerSMEsIndividuals

LenderBanksMicroCredit

Market

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Information AsymmetryHow much Borrowed?

Infrastructure

PensionFunds &Insurance

BondMarket

Gov. banks

GovernmentBond

LargeCompanies

Banks

b k

Long term Credit Banks

SME

VentureBusiness

SME banks

Venture Capital

Micro creditS

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ReferencesYoshino, Suzuki, Maehara and Abe (2009)

Development of Corporate CreditInformation Database and Credit Information Database and Credit Guarantee System, ASEAN Secretariat, Feb. 2009.

OECD (2010),Southeast Asian Economic Outlook, Fall 2010, Chapter 6 (Yoshino), , p ( )

Yoshino, N., OECD-ADB, THE GLOBAL IMBALANCE AND THE DEVELOPMENT OF CAPITAL FLOWS AMONG ASIAN COUNTRIESFebruary 8, 2012, Tokyo, Japan 55